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The cozy little world of gold trading is getting less comfortable.
A handful of bankers in London currently set the world standard for gold prices, a practice that started in 1919 and is widely used by governments, miners and brokers to buy and sell the precious metal and its financial derivatives.
But regulatory probes have shone an unwanted spotlight on the benchmark known as the London gold fix, and prompted calls for change.
The five banks that set the standard - Barclays, Bank of Nova Scotia, Société Générale, Deutsche Bank and HSBC - have been hit by multiple lawsuits from investors alleging they colluded to rig the price for their own benefit. Deutsche Bank, which gave up its seat on the gold-ixing panel, said the lawsuits had no merit. Barclays, SocGen and HSBC had no comment, and Scotiabank could not be reached.
"This is a setting that is very easy to be manipulated either by one individual bank or by a group of them," said Rosa Abrantes-Metz, an associate professor with New York University's business school, whose research identified a series of unusual trades before the gold benchmark was announced.
"It completely lacks oversight and involves a very small group of competitors, so it is easy to co-ordinate behaviour," she said.
After accusations of interest rate rigging surfaced two years ago, regulators and investors started questioning the integrity of all benchmarks, including those used for oil, silver and foreign exchange prices.
Because spot gold is traded around the clock, the London gold fix is used as a benchmark similar to a publicly traded company's closing price on a stock exchange. But it appears woefully out of date in a world where material information is disseminated on Twitter and retail investors can monitor stock prices online.
Not much has changed since the early 1900s, when five bankers from the largest bullion houses used to convene at the Rothschild headquarters in London at 10:30 a.m. and 3 p.m. to determine the benchmark.
The bankers still get orders to sell and buy gold bars from their clients and their own accounts. They then try to match orders until there is an agreed upon price and that becomes the global benchmark.
The banks are now different than the original five bullion houses and their representatives dial into a conference call instead of meeting in person.
But there is still no transparency, no oversight and no public record of the orders. And that has raised red flags for regulators and investors, including concerns of collusion and front running.
"There are serious reasons to be suspicious about manipulation," said one European-based financial supervisor, who requested anonymity because regulatory probes are ongoing.
British regulator the Financial Conduct Authority has been reviewing the five banks' internal controls, one person familiar with the matter said.
It recently fined Barclays £26-million for failing to control a trader who created fake orders to lower the benchmark.
The other four banks have not been charged with any wrongdoing.
The unrelenting scrutiny impeded the search for a replacement for Deutsche Bank, which relinquished its spot on the benchmark setting panels when it scaled back its commodity business this year.
That forced the fixing operator to kill the "London silver fix," another century-old tradition that uses the same process as the gold fix.
The industry is now racing to find a substitute to the London silver and gold benchmarks.
"Recent events accelerate the need for either a wholesale reform of the current benchmark or its replacement by a suitable alternative in order to maintain investor confidence," said the World Gold Council, an industry group that tracks the supply and demand in gold.
It is unknown whether the alternatives will usher in more transparency or get rid of the conflicts of interest.
The London Bullion Market Association, a trade group for precious metal dealers and banks, is asking the public for input.
A number of exchanges are angling for a piece of the action, including the U.S.-based CME Group, a futures exchange that allows contracts for gold to be traded nearly 24 hours a day, and the London Metal Exchange, which trades industrial metals like nickel and copper.
Some have proposed using the U.S. futures prices as a replacement. Others have suggested more reliance on the Shanghai Gold Exchange or the Dubai Gold and Commodities Exchange, though their contracts are too thinly traded to garner market confidence.
Regardless, the precious metal industry is preparing for changes.
"I understand that in this day and age we need more transparency and we need an audit trail that you can rely on," said Pierre Lassonde, a Canadian mining veteran whose company Franco-Nevada Corp. relies on the benchmark to settle contracts.
But Lassonde said: "I have never been concerned about the gold fix and still don't have any concerns about it."